American Express 2010 Annual Report Download - page 113

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The following table details the Company’s cardmember loans
and receivables exposure (including unused lines-of-credit on
cardmember loans) in the United States and outside the United
States as of December 31:
(Billions, except percentages) 2010 2009
On-balance sheet:
United States $77$47
Non-U.S. 21 20
On-balance sheet
(a)
$98$67
Unused lines-of-credit — individuals:
United States $ 184 $ 181
Non-U.S. 42 41
Total unused lines-of-credit — individuals $ 226 $ 222
(a) Represents cardmember loans to individuals as well as receivables from
individuals and corporate institutions as discussed in footnotes (a) and
(d) from the previous table.
The remainder of the Company’s on-balance sheet credit
exposure includes cash, investments, other loans, other
receivables and other assets, including derivative financial
instruments. These balances are primarily within the
United States.
EXPOSURE TO AIRLINE INDUSTRY
The Company has multiple co-brand relationships and rewards
partners, of which airlines are one of the most important and
valuable. The Company’s largest airline co-brand is Delta Air
Lines (Delta) and this relationship includes exclusive co-brand
credit card partnerships and other arrangements, including
Membership Rewards, merchant acceptance and travel.
American Express’ Delta SkyMiles Credit Card co-brand
portfolio accounts for approximately 5 percent of the
Company’s worldwide billed business and less than 15 percent
of worldwide cardmember lending receivables.
In recent years, there have been a significant number of airline
bankruptcies and liquidations, driven in part by volatile fuel
costs and weakening economies around the world. Historically,
the Company has not experienced significant revenue declines
when a particular airline scales back or ceases operations due to
a bankruptcy or other financial challenges because volumes
generated by that airline are typically shifted to other
participants in the industry that accept the Company’s card
products. The Company’s exposure to business and credit risk
in the airline industry is primarily through business
arrangements where the Company has remitted payment to
the airline for a cardmember purchase of tickets that have not
yet been used or “flown”. The Company mitigates this risk by
delaying payment to the airlines with deteriorating financial
situations, thereby increasing cash withheld to protect the
Company in the event the airline is liquidated. To date, the
Company has not experienced significant losses from airlines
that have ceased operations.
NOTE 23
REGULATORY MATTERS AND CAPITAL
ADEQUACY
The Company is supervised and regulated by the Federal
Reserve and is subject to the Federal Reserve’s requirements
for risk-based capital and leverage ratios. The Company’s two
U.S. bank operating subsidiaries, Centurion Bank and FSB
(collectively, the “Banks”), are subject to supervision and
regulation, including similar regulatory capital requirements
by the FDIC and the Office of Thrift Supervision (OTS). As
of July 21, 2011, subject to a possible six-month extension,
supervision and regulation of FSB will be transferred to the
Office of the Comptroller of the Currency (OCC), pursuant to
the Dodd-Frank Reform Act.
The Federal Reserve’s guidelines for capital adequacy define
two categories of risk-based capital: Tier 1 and Tier 2 capital (as
defined in the regulations). Under the risk-based capital
guidelines of the Federal Reserve, the Company is required to
maintain minimum ratios of Tier 1 and Total (Tier 1 plus
Tier 2) capital to risk-weighted assets, as well as a minimum
leverage ratio (Tier 1 capital to average adjusted on-balance
sheet assets).
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional, discretionary
actions by regulators, that, if undertaken, could have a direct
material effect on the Company’s and the Banks’
operating activities.
As of December 31, 2010 and 2009, the Company and its
Banks were well-capitalized and met all capital requirements to
which each was subject. Management is not aware of any events
subsequent to December 31, 2010 that would materially,
adversely affect the Company’s and the Banks’ 2010
capital ratios.
111
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS